Managing inflation alongside growth will be the priority for businesses over the medium term. Ajanta Pharma presents itself as a company with better pricing power compared to its peers due to its largely branded drug portfolio. The pace of product launches, which has driven multi-bagger returns over the past decade, may be entering a “normalized growth” phase. But Ajanta Pharma can still outpace IPM (Indian Pharmaceutical Market) growth by consolidating its various operations in high-growth markets. The stock offering margin protection and above industry growth potential is trading at 18.5x, with FY23 earnings providing a good buying opportunity at present.
From 2010 to 2016, Ajanta Pharma generated a CAGR of 30% with high operating margins (35%) and the stock returned more than 100 times. The differentiated growth strategy was built on outsourcing API production, a focus on marketing, a limited focus on therapy, all achieved with abundant ground strength (for a company of its cut).
Beginning in 2016, the company simultaneously encountered slight headwinds in every segment. Within its largest geographic segment, India, the GST transition, ban on fixed-dose combinations, and regulatory hurdles in a key product (the derma product was used as a cosmetic that had to be relaunched in smaller scale) had an impact on growth. Currency volatility in Asia and the loss of institutional sales in Africa (then representing 13% of total sales) were headwinds for emerging markets. The Covid period has mainly impacted US business, as product inspections have been delayed.
Operations in India
The company has increased its ranking nationally from 88th in 2005 to 29th in 2021 according to IQVIA. Ajanta Pharma’s marketing through Medical Representatives (MRs) is key to reaching a large portion of key medical practitioners in its four core therapies in cities (Tier I-III). The MR strength of 2,800 (streamlined from 3,000) is split between Cardiology (800), Ophthalmology (800), and Dermatology (800). Even pain management where the business is growing gets 300 MR.
With the optimized field force now fixed for the short term, the focus will be on improving RM productivity. This focus allows for better reach compared to larger national peers that run a distributed therapeutic focus and international majors with a narrow geographic reach.
The company identifies service gaps in therapies and hence much of the 300 product portfolio goes from first to market launch in India. New products are a key driver of IPM’s growth, which has gone from high growth of 15-16% in the early 2000s to 10-11% today. The company’s brand portfolio with the launch of new products should also enhance this growth.
Ajanta Pharma has built a front-end (MR force and distributor network) in Asia and Africa, similar to its strategy in India. The African market includes a branded market (in West African countries) and an institutional business supplying antimalarial drugs to WHO and African governments.
On a smaller basis by adding new products, US business has grown 30% CAGR since FY2017 and the company says it has been profitable since FY2019. needs a broader portfolio to grow, well beyond the 30 odd products approved for Ajanta Pharma. Product approvals have been hampered by the lack of inspections in times of Covid. These products may see the light of day now as inspectors resume audits, but only if the unit economics of the product itself has not deteriorated significantly (the United States being a high erosion market typical of generics ).
Ajanta Pharma comment may be moderated with reduced launch plan. But the expected 10-12 launches per year can still support growth on a smaller base, even overcoming higher price erosion.
Finances and valuation
India, Asia and Africa brand business is now better positioned with only a lingering supply chain issue in Asia, but the impact of the Covid portfolio decline has not been high on d other markets. On the unbranded side, US generic projects were subdued and the contribution from institutional firms in Africa decreased, which reduced the associated volatility. The company delivered 16% revenue growth in the 9 months of FY22 with participation from all segments and EBITDA margins of 30%.
Visibility of topline growth
Margin protection levers
Creation of targeted therapeutic brand
Higher input costs in Q3-FY22 come on top of higher post-Covid operating costs and higher US generics revenues (lower margins versus branded products). With raw material costs, including API, expected to increase in the near term, industry margins may come under additional pressure. But Ajanta Pharma derives almost 70% of its revenue from branded generics, which allows for better pricing power than other generic-to-generic manufacturers. Currently, 15 percent of the domestic portfolio is subject to the price control mechanism. Even so, the company expects to pass on the maximum possible price increase (10%) as soon as possible.
The company has invested in investments worth ₹1,600 crore (no balance sheet debt) since FY2016 and now only plans maintenance investments. Increasing asset utilization should boost operating leverage while increasing MR productivity can add another lever to profitability.
April 16, 2022